Insight

Dodd to Unveil Revised Legislation on March 15 - Ted Allen - Governance

2010-03-12T18:20:34Z

Senator Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, plans to unveil a revised financial reform bill on March 15.

It remains to be seen whether the new legislation will contain all of the governance provisions that appeared in the original bill, which included an annual “say on pay” vote mandate and authorization for the SEC to adopt a proxy access rule. Dodd’s original 1,136-page bill also included provisions to require majority voting in uncontested board elections and to require shareholder ratification of classified boards. The House of Representatives already has approved a narrower reform bill with advisory vote and proxy access language.

]]> “Over the last few months, Banking Committee members have worked together to try and produce a consensus package,” Dodd said in a press release. “Together we have made significant progress and resolved a many of the items, but a few outstanding issues remain.”

While Dodd has been negotiating with Senator Bob Corker of Tennessee and other committee Republicans since December, the Republicans have not agreed to endorse Dodd’s revised legislation.

“It has always been my goal to produce a consensus package. And we have reached a point where bringing the bill to the full committee is the best course of action to achieve that end,” Dodd said. “I plan to hold a full committee markup the week of March 22.”

“Our talks will continue, and it is still our hope to come to agreement on a strong bill all of the Senate can be proud to support very soon,” Dodd said.

Senator Richard Shelby, the ranking Republican on the committee, said that an agreement on the bill is still possible. “If my Democrat colleagues are interested in enacting reforms that protect American taxpayers, promote economic growth, and preserve the competitiveness of our financial markets, there is no reason that we cannot reach an agreement,” Shelby said in a statement.

While agreeing that Dodd’s revised legislation “will be closer to a consensus package because of our efforts,” Corker said in a press release that the revised bill was not produced in a “bipartisan way.” In an interview with the National Journal, Corker warned that it would be a "travesty" to push this complex legislation through the committee in a week.

Jeff Mahoney, general counsel for the Council of Institutional Investors, said the group remains hopeful that majority voting and proxy access will be in the revised bill, but he noted that Corker and committee Republicans have drawn “a line in the sand” against access.

TheCorporateCounsel.net blog reported today that Dodd’s revised bill likely will include pay provisions derived from a recently introduced bill by Senator Robert Menendez of New Jersey. That legislation calls for an annual advisory vote on compensation, separate shareholder votes on severance packages, limits on executive sales of equity awards during a five-year period after vesting, a new SEC rule to require issues to disclose the ratio of median employee compensation to the CEO’s pay, and stricter SEC rules on compensation “claw backs.”

The Democrats hold a 13-10 majority on the Banking Committee, and thus they have enough votes to get Dodd’s bill out of committee, but he would need to enlist a few Republicans to fend off a potential GOP filibuster on the Senate floor.

'4.8 Billion People Have Access to Medicine - 2 Billion to Go': A Look at the 2010 Access to Medicine Index - Alan Petrillo - ESG

2010-03-12T16:47:00Z

On March 9, The Access to Medicine Foundation released the methodology for this year’s Access to Medicine Index, which will be released this summer. First published in 2008, the Index ranks major pharmaceutical providers on their efforts to help poorer nations fight their deadliest diseases.

Innovest, which is now part of RiskMetrics Group, led the development of the 2008 Index. RiskMetrics Group’s ESG Analytics team has again worked with Access to Medicine to revise and update its Index methodology to incorporate feedback from stakeholders, and also to keep up with changes in the global health situation.

]]> The Access to Medicine Foundation seeks not only to measure corporate performance, but to spur companies to work with governments and NGOs to find new ways to ease the suffering of the world’s neediest people. Foundation Chairman Wim Leereveld has said, as quoted above, that 2 billion people remain vulnerable not only to epidemics like HIV/AIDS, but also to diarrhea and respiratory ailments that are rarely fatal in developed countries.

“For 2010, we have improved our measurement of companies’ output, innovation and transparency. In the updated methodology, we continue to emphasize that innovative business models can both increase access to medicine and be a crucial part of the companies’ long term emerging markets business strategy,” said Afshin Mehrpouya, project manager for the Access to Medicine Index project at RiskMetrics Group.

More Scrutiny for Treatment of Non-Communicable Disease

The 2010 Index includes 27 companies. Of these, 20 are “originators” of new medications, and seven make generic drugs. In a first for the Index, two privately-held companies are constituents.

Other refinements for 2010 reflect input gathered from stakeholders since the 2008 Index. Perhaps the most significant change is a heightened emphasis on non-communicable diseases. The revised methodology adds more indicators focusing specifically on illnesses such as diabetes, asthma and heart disease. While they are not epidemics, the long-term social burden caused by such mostly chronic diseases is significantly higher than that of communicable diseases.

In sum, the 2010 Index covers 33 diseases, including Neglected Tropical Diseases (such as dengue), the top 10 non-communicable diseases and the top 10 communicable diseases according to the World Health Organization Global Burden of Disease project.

Poverty is Not the Only Factor

While a nation’s poverty certainly affects its citzens’ access to medicine, the connection between wealth and health is inelastic. The poorest nations are not necessarily the sickest, while some relatively high-earning nations report some of the worst health numbers.

These numbers are disquieting. According to World Health Organization statistics, 53.9% of people born in Zambia will die before the age of 40. Zambia’s GDP per capita places it in the “Low Income” category. Vietnam is another “Low Income” nation, but only 6.7% of its people are expected to die so young. In “Upper Middle Income” Namibia, the rate is 35.9%.

Such wide disparities between nations shows the importance of multinational organizations, including drug companies, in improving health conditions worldwide.

How Companies are Evaluated

To refine the 2010 methodology, The Access to Medicine Foundation and the RiskMetrics team engaged with stakeholders through an online survey and meetings in the US and England, as well as NGOs from the Index nations in Nairobi, Kenya. Input from stakeholders and from Access to Medicine Index’s Expert Review Committee helped shape the final methodology, which organizes its evaluation around four “pillars”: Commitments, Transparency, Performance, and Innovation.

(The pillars encompass the same seven technical areas that were studied in 2008: General Access to Medicine Management; Public Policy & Market Influence; Research & Development; Equitable Pricing & Distribution; Patents & Licensing; Capability Enhancement in Product Development & Distribution; Drug Donations & Philanthropic Activities.)

Each pillar is integral to the Index’s measure of how the 27 companies support access to medicine:

- Commitments: This considers the formal statements and goals produced by each company regarding access to medicine initiatives.

- Transparency: This focuses on how effectively companies disclose and report info needed to externally assess their access to medicine efforts.

- Performance: An evaluation of the implementation and impact of corporate initiatives.

- Innovation: This focuses on innovative practices that can have an ongoing positive effect on access to medicine in poor nations. Considering the difficult or different socioeconomic environments in most of these countries, innovative business models are essential to success.

Companies Should Focus on Core Competencies

In explaining the Innovation pillar, the methodology document makes an important point about the entire Access to Medicine Index. Some stakeholders raised concerns about a potential conflict of interest if drug companies were asked to get involved outside the drug supply chain. From the methodology:

…Pharmaceutical companies should be primarily rated based on activities consistent with their core competencies, and while other innovative activities should be taken into consideration, they should not have significant weight and visibility in the Index. Having a separate strategic pillar for Innovation is compatible with the strategic goal of the Index to be a driver for innovation in provision of access to medicine in the Index Countries.

By recognizing the limits of even the largest drug firms, the Access to Medicine Index ensures strong corporate participation in the project. (The Foundation’s affiliation with the Bill & Melinda Gates Foundation and the Dutch and UK governments also helps.) This summer, the foundation will present the rankings for 2010 to representatives of the drug industry, multilateral organizations, the media and the NGO community.

Another important set of stakeholders will also be present: institutional investors. The success of the Access to Medicine Index depends on support from shareholders who, collectively, manage $2 trillion in assets. Click here to see these investors’ statement of support for the Access to Medicine Index.

Please visit www.atmindex.org to learn more about the Foundation and the Access to Medicine Index.

Two Different Views on the Apache-Chevedden Decision - Ted Allen - Governance

2010-03-12T15:51:57Z

While a federal judge ruled for Apache in its lawsuit against retail activist John Chevedden, shareholder advocates are praising the judge's decision as a "dramatic win" that will help investors in future disputes with companies over investor resolutions.

On March 10, U.S. District Judge Lee Rosenthal ruled that Apache may exclude Chevedden's proposal that seeks to rescind supermajority rules because he missed the 14-day deadline for presenting evidence that he owned the energy company's stock. However, the court expressed skepticism about Apache's various arguments that Chevedden's evidence was insufficient.

"The case was a split decision, but shareowners won. Apache got a consolation prize," noted Glyn A. Holton, director of the United States Proxy Exchange, a Massachusetts-based investor advocacy group that filed a brief in support of Chevedden. "We doubt Apache Corp. will be suing any more resolution proponents soon. If they do, shareowners will be more than ready for them."

]]> The company's lead lawyer in the case, Geoffrey L. Harrison, had a different take on the ruling. "This obviously is a big win for Apache. It also is a big win for responsible corporate governance," he said in a press release.

The case illustrates the governance challenges posed by the convoluted manner through which most U.S. investors own their stock. Most investors hold their shares as beneficial owners; their holdings typically are overseen by brokers, who buy and sell shares from the Depository Trust & Clearing Corporation (DTC), a nationwide clearing entity that has existed since the 1970s. As a general matter, only the names of DTC or its nominee, Cede & Co., appear as record owners on company stock ledgers, while brokers and their clients technically own "security entitlements." In addition, many investors are deemed "objecting beneficial owners" (OBO) under SEC rules. Companies don't have access to OBO names and must work through an intermediary like Broadridge Financial to contact them.

Both investors and companies agree the case is an example of why the current ownership system is in need of reform. In response to the Apache ruling, Niels Holch, executive director of the Shareholder Communications Coalition, which represents corporate groups, observed: "[T]he opinion provides an excellent description of the multiple layers of financial intermediaries between a public company and its beneficial owners. This dispute is one more reason why reform of the proxy voting and shareholder communications system is so important."

The Apache-Chevedden case arose after the company filed a federal lawsuit in January in Houston, instead of asking the SEC for permission to exclude the proposal through the agency's no-action process, as most issuers do. Apache's decision to sue may have been a response to Chevedden's successful activism in recent years. Chevedden and his network of retail investors have submitted dozens of proposals each year that seek board declassification, the right of shareholders to call special meetings, the repeal of supermajority rules, cumulative voting in board elections, and other reforms. Many of their proposals have won majority support. In one of its briefs, Apache, a company with a $36 billion market cap, took issue with Chevedden’s self-portrayal as “a small investor,” and instead described him as the “Goliath” of shareholder proposals.

After Apache filed suit, CorpGov.net publisher Jim McRitchie and other activists expressed concern that other companies would try similar tactics to block proposals from retail investors if Apache prevailed.

At issue in the case was SEC Rule 14a-8(b)(2), which details the proof of ownership that proponents must provide to present a shareholder proposal. Under that rule, an investor who is not a registered share owner must submit a written statement from the "record" holder of the investor's securities (usually a broker or bank) verifying that, at the time the proposal was submitted, that he or she continuously held the securities for at least one year.

In 2008, the SEC staff rejected a similar challenge by Hain Celestial to a North Dakota reincorporation proposal from Kenneth Steiner, a member of Chevedden's investor network. In that case, the company argued that a letter from the proponent's broker-dealer that confirmed ownership failed to cure inadequacies in a proof-of-ownership letter initially provided by the filer's custodian. In rejecting that petition, however, the SEC staff said that a written statement from an "introducing broker-dealer constitutes a written statement from the 'record' holder of securities," as required under the federal proxy rules.

Chevedden--who, like most retail investors, is not a registered share owner--sent Apache four letters to provide evidence of ownership. Three letters were from Ram Trust Services (RTS), which Chevedden asserted was his "introducing broker," certifying that Chevedden was the beneficial owner of Apache stock, while another was from Northern Trust, certifying that it held Apache stock as "master custodian" for RTS. Northern Trust is a member of the DTC, while the DTC's Cede & Co. is listed in Apache records as the owner of its shares. Apache's records do not identify the beneficial owners of the shares held in the name of Cede & Co.

Chevedden argued that Rule 14a-8(b)(2) was satisfied by a letter from RTS, his "introducing broker," while Apache asserted that Chevedden was required to obtain a confirming letter from the DTC. Chevedden and the U.S. Proxy Exchange countered that it would be impossible for the DTC to provide a confirming letter because it would have no idea what shares Chevedden held.

While Judge Rosenthal didn't formally rule on the sufficiency of Chevedden's evidence of ownership, she did not agree with Apache's narrow interpretation of Rule 14a-8(b)(2). Observing that the DTC is neither a broker or a bank, the judge said the rule permits but does not require Chevedden to obtain a letter from the DTC.

Holton said this part of the judge's ruling is significant, because "a ruling on the issue in Apache's favor would have crippled shareowners' ability to submit proposals."

The judge also rejected Apache's argument that the SEC's Hain decision was a "rogue" decision, noting various post-Hain no-action letters where the staff has reached similar conclusions. "The SEC staff's position in Hain Celestial and the similar letters is more consistent with the text of Rule 14a-8(b)(2) than the position Apache advances," she wrote.

Notwithstanding the court's skepticism about some of Apache's arguments, Harrison said the judge's decision "should curtail the submission of proposals from those who otherwise might pretend to be shareholders when, in fact, they are not."

"Apache's aggressive and successful litigation approach here is a game-changer that very well may have a dramatic impact on the way shareholders make proposals, and the way companies respond to them," Harrison said. "By winning this lawsuit, we have helped Apache protect the sanctity of its proxy statement ballot for the benefit of its true shareholders."

Top ESG Issues for 2010 Proxy Season: Climate Change, Toxics and the Impact of Natural Gas 'Fracking' on the Water Supply - Carolyn Mathiasen - ESG

2010-03-11T15:15:00Z

[Ed. Note: In the March 5th issue of Risk & Governance Weekly, RiskMetrics analyst Carolyn Mathiasen surveyed this season’s environment-related proxy proposals. While much of the information in that report is available only to RiskMetrics clients, Carolyn and R&GW Editor Ted Allen graciously agreed to share an edited version with ESG Insight readers. Learn more about the 2010 proxy season at the Proxy Season Resource Center.]

Environmental questions are receiving a lot of attention from shareholders during the spring US proxy season, including 39 resolutions about global climate change. Other prominent shareholder concerns include the impact of hydraulic fracturing, a method of extracting natural gas that may contaminate major US aquifers; the toxicity of common consumer goods; and the quality of corporate reporting on environmental, social and governance (ESG) issues.

Investors should note that the SEC has been generally supportive of 2010 resolutions on these ESG topics, which was not always the case in years past. Also notable is that some companies are resisting an AFL-CIO climate-related resolution because, they argue, it is too broad in its demands.

]]> 2009 SEC Bulletin Opened Door to Resolutions on Climate Risk Materiality

Along with the 39 resolutions on climate change, RiskMetrics Group's ISS Governance Service is also tracking 55 resolutions about other environmental issues, many of which, such as forestry, have implications for the global warming debate. In addition, many of the 36 resolutions that ask companies to report on their sustainability efforts call for better climate change-related disclosure.

Most climate change proposals, as in earlier years, ask companies to report on efforts to reduce their greenhouse emissions or to set reduction goals. There are a few new wrinkles, though, including some proposals asking directly about financial risk from climate change and an AFL-CIO campaign to get companies to adopt a set of principles to reduce greenhouse emissions.

Resolutions calling for firms to address material climate risks are made possible by the Securities and Exchange Commission's Staff Legal Bulletin in October 2009. That Bulletin legitimized ESG-related resolutions that request an evaluation of business risk as long as the underlying issue raises a significant policy question.

New resolutions from the Christopher Reynolds Foundation, the Needmor Fund, and the State of Connecticut asked Chevron, ConocoPhillips, and ExxonMobil to report "on the financial risks resulting from climate change and its impacts on shareholder value over time."

Past Climate-Related Campaigns Now Bearing Fruit

As in past proxy seasons, many shareholders are asking for reports on "how the company is responding to rising regulatory and public pressure to significantly reduce greenhouse gas emissions." This wording had run into trouble under the SEC's old risk assessment policy, but is now likely to survive corporate challenges.

According to the Ceres coalition, which is coordinating shareholder activity on environmental resolutions, resolutions with this wording are pending at Consol Energy and International Coal. The Unitarian Universalist Association withdrew the same resolution at Alpha Natural Resources after the company agreed to analyze its climate risks and develop a strategy to address them.

Some Companies Push Back on AFL-CIO Proposal

A new AFL-CIO resolution asks companies to adopt a set of six principles, ranging from setting emission reduction targets to using revenues from the carbon market to invest in clean energy and assist states in addressing global warming impacts.

A spokesman for the campaign told RiskMetrics the proposal had been withdrawn at American Express and Best Buy after the companies had committed to substantially implementing it. He said the labor federation was in discussions with other firms regarding similar withdrawals. Safeway and Walmart, however, have filed “no-action” challenges to the AFL-CIO proposal, arguing that the resolution is impermissibly vague and improperly combines six requests in a single resolution.

SEC Permits Resolutions about Fracturing

The biggest new campaign involves hydraulic fracturing--the process in which water, sand, and a mix of chemicals are blasted into tight layers of shale to extract natural gas. (See this December 2009 ESG Insight article for more about fracturing.)

Investors ranging from the New York State Common Retirement Fund to Green Century to the As You Sow foundation are asking for reporting on the environmental impact of fracturing and potential policies to reduce the hazards from the process.

The fracturing resolution is now pending at a number of gas production firms, including Cabot Oil & Gas and EOG. Both of these firms submitted early challenges to the resolution on ordinary business grounds, and both were turned down by the SEC. Commenting on its decision, the SEC staff said, "In our view, the proposal focuses primarily on the environmental impacts of [the companies'] operations and does not seek to micromanage the company to such a degree that we believe exclusion of the proposal would be appropriate."

The issue of Gulf Coast wetlands is coming up this year for the first time in shareholder resolutions. Some religious investors have joined Green Century in asking ExxonMobil and ConocoPhillips to adopt policies about the environmental hazards of their oil and gas-related activities in coastal Louisiana. The resolutions cite studies that conclude that "the direct and indirect effects of oil and gas exploration, recovery, and processing are together responsible for 40 to 60 percent of documented wetland loss."

Bisphenol A and Pesticides a Risk for Food Companies?

In other environmental issues, the Investor Environmental Health Network is in its fifth year of coordinating filing of resolutions asking companies to review or reduce the toxicity of their products. Among the new proposals is one at Coca-Cola on the use of bisphenol A (BPA) in can liners. The issue took on new relevance after the Jan. 15 announcement by the US Food and Drug Administration that it now has concerns about the health risks of the substance.

The proponents--Domini Social Investments, Trillium Asset Management and As You Sow--released a March 3 statement seeking support for the proposal, arguing that the use of bisphenol A is "exposing the company to significant financial and regulatory risks" and asserting that "the information that Coca-Cola posts on its website is distressing and suggests that the company lags behind its peers in addressing potential risks associated with BPA and aggressively exploring alternative packaging options."

Another new toxics proposal comes from Trillium to Chipotle asking for a report on how the company is addressing pesticide use reduction in its supply chain. That proposal stresses concerns about the effects of pesticides on farm workers.

Fleshing Out the Sustainability Report

The number of resolutions asking companies to file reports on their efforts to achieve sustainability remains at a high level. RiskMetrics has tracked 36 for 2010, 16 of which were withdrawn after agreements with companies. Withdrawal agreements have been common in the sustainability area; 20 of 30 proposals were withdrawn in 2009.

As in the past, many of the resolutions suggest that companies follow the sustainability-reporting format of the Global Reporting Initiative, an offshoot of a joint project by Ceres and the United Nations Environmental Program. Some of this year's proposals also suggest that target companies use the Carbon Disclosure Project as a means to specifically report on greenhouse gas emissions and reduction efforts.

For more, please visit the Proxy Season Resource Center .

SEC Allows Two Banks to Omit Bonus Banking Proposal - Ted Allen - Governance

2010-03-09T17:10:30Z

The SEC has ruled that Bank of America and JPMorgan Chase may omit the American Federation of State, County, and Municipal Employees’ new “bonus banking plus” proposal, which seeks changes in how the banks compensate their 100 most highly paid employees.

The agency staff concluded that the AFSCME resolution did not focus on the relationship between executive compensation and excessive risk-taking. The staff found that the proposal related to general employee compensation, which traditionally has been viewed as an “ordinary business” matter, and thus is not a proper subject for a shareholder resolution.

“We are disappointed by the SEC’s ruling,” said John Keenan, a strategic analyst with AFSCME. “On one hand, Pay Czar Ken Feinberg has the authority to regulate pay of the top 100 paid employees at the big seven TARP firms, and the Federal Reserve is reviewing the link between compensation and risk at the largest 25 banks, and yet the SEC is allowing Bank of America and JPMorgan to omit our bonus banking proposals on ordinary business grounds. As the financial crisis plainly shows, compensation practices for traders, brokers, and investment bankers, and not just the senior executives, can [incentivize] unnecessary and excessive risk.”

AFSCME has submitted similar proposals at Wells Fargo and Goldman Sachs, which also have filed no-action requests. They both argue that the resolution relates to “ordinary business” and is “misleading.”

To see the Bank of America ruling, please click here.

ESG 'Active Owners,' Like Norway, Have Better Control of Investment Horizons - Alan Petrillo - ESG

2010-03-05T14:28:00Z

Responsible Investor has reported that Norway’s sovereign wealth fund is stepping up its engagement with the companies whose shares it owns. In some cases, Norges Bank’s Global Pension Fund will opt for “active ownership” of a company that violates its ethical norms, rather than avoiding the stock entirely. Engagement “might reduce the risk of continued violations of ethical norms better than exclusion, which leaves the fund with no influence once shares are sold,” wrote RI’s Hugh Wheelan.

]]> While Norway’s investment strategy explicitly seeks to “lobby the corporation,” its long-term perspective holds lessons for mainstream investors. A recent study found that socially responsible investing (SRI) fund managers do a better job of conforming to their stated investment horizons. Perhaps more “active ownership” could help even non-SRI managers better serve their objectives, and their clients.

Investment Horizons: Do Managers Do What They Say? found that nearly two-thirds of its sample of institutional investor-focused investment strategies exceeded their expected turnover from June 2006 through June 2009. 21.2% of non-SRI funds experienced more than twice their intended annual portfolio turnover. Only 6.3% of SRI funds overshot their targets by such margins. This suggests that the environmental, social and governance (ESG) research that supports “active ownership” of companies also enables more precise management of portfolios.

The study was produced by Mercer for the Investor Responsibility Research Center (IRRC) Institute.

Volatility Feeds on Itself

Short-termism has long been a concern for SRI, but Mercer’s research suggests that portfolio churn is a problem for the market as a whole.

Civil engineers recall the 1940 collapse of the Tacoma Narrows Bridge, which fell because its design amplified the force of strong winds. In its study, Mercer suggests that shortsighted alpha-chasing has a similar effect on the edifice of finance:

…There is a valid question to be asked about cause and effect; more specifically, behavioral finance evidence suggests that investor psychology and speculative investment activity contribute to higher asset price volatility, creating a vicious cycle of asset price volatility and short-term horizons.

"This is not only particular to day traders or arbitrage funds or others who may have short time horizons by design,” said Jon Lukomnik, IRRC program director.

“When two-thirds of long-only equity institutional investment products have turnover that exceeds what they themselves expect, there is a systemic issue."

Norway Takes the Long View

The IRRC/Mercer study endorses no one solution to inadvertent short-termism, but it does call for an “incentive system and corporate culture…that encourages long-term thinking.” Norges Bank has built such thinking into the DNA of its pension fund. Investment & Pensions Europe has described the bank’s revised ethical guidelines [free login required]:

[Norges Bank’s previous] ethical guidelines will be replaced by two new sets of guidelines:

• Work linked to exclusion and observation of companies
• Norges Bank's work on responsible management and exercise of ownership rights

The first set of guidelines will enable a slightly broader assessment of the situation before a company is excluded on ground of grossly unethical behavior. …

The Ministry will then closely monitor the companies on the watch list to see if they implement measures to remedy the situation, before a final decision is made on exclusion, or whether it intends to use alternative measures if it believes active ownership or observation might reduce the risk of continued violations.

Fund Managers Must Manage Expectations

Of course, not every investor is interested in policing corporate behavior, but more strategic ESG-supported portfolio management could bring material benefits to any investor. In an address last month, Roger Urwin of UK manager Towers Watson said that “longer-term mandate criteria and ESG research could save up to 100 basis points in investment costs per annum,” according to RI.

Still, as the IRRC/Mercer study details, the systemic bias towards quick turnover of equities won’t change overnight. As part of their research, the authors interviewed a number of fund managers for their perspectives on time horizon. The head of one SRI fund told them that “companies need to manage investors’ expectations. Equities are not meant to have large returns over short periods of time.”

The (unnamed) manager then articulated a principle of investing that Norges Bank could subscribe to:

“Buying a share of a company represents buying a share in the business. If an investor doesn’t think of equities that way, then he or she is simply acting as a gambler and is ‘betting on a horse’.”

For more information on Norges Bank, see their 2009 annual report, which was released today.

RiskMetrics to Hold 2010 Proxy Season Preview Webcast on March 9 - Sarah Cohn - Governance

2010-03-04T18:48:31Z

On Tuesday, March 9 at 1 p.m. ET, RiskMetrics will hold a 2010 Proxy Season Preview Webcast. Please join us as we preview the key 2010 corporate governance issues for season, including compensation, say-on-pay, vote-no campaigns, independent chairs, new board disclosures, and environmental and social issues. We will also discuss the outlook for shareholder proposals this year.

Patrick McGurn, Special Counsel at RiskMetrics Group, will lead a discussion with other governance issue experts at RiskMetrics. To register for the webcast, please visit here.

Has 'Say on Pay' Reached a Tipping Point? - Ted Allen - Governance

2010-03-04T18:29:32Z

Seven more large-cap firms have agreed to hold advisory votes on executive compensation, according to “say on pay” proponents.

The companies include Capital One, which included a management-sponsored vote in its preliminary proxy statement for its April 29 annual meeting. Morgan Stanley has reached a tentative agreement with proponents to conduct a pay vote this year, according to Calvert Asset Management, while U.S. Bancorp has told Walden Asset Management that it will hold a 2010 advisory vote. All three firms held mandatory pay votes last year when they were participants in the U.S. government’s Troubled Asset Relief Program (TARP), and received more than 90 percent support for their pay practices.

Fifth Third Bancorp has agreed to continue holding advisory votes after it exits the TARP program, proponents said. Another recent adopter is consumer products firm Colgate-Palmolive, which announced it would hold its first advisory vote on May 7 and then every two years. In addition, Sun Trust Banks and Honeywell International have recently reached agreements to hold advisory votes, proponents said.

Overall, at least 56 U.S.-based companies have held voluntary “say on pay” votes or have agreed to do so, according to data collected by RiskMetrics Group’s ISS Governance Services unit.

“It’s been a natural evolutionary process for companies to embrace a relatively new idea like ‘say on pay.’ But now we are reaching the tipping point,” Timothy Smith, senior vice president at Walden, said in a press release this week. “Less than a year ago, only a handful of companies had adopted the vote. Now more than 50 companies have agreed to do so, with more stating a higher comfort level with the concept.”

Issuers Allowed to Omit Proposals on CEOs on Pay Panels - Ted Allen - Governance

2010-03-03T18:41:30Z

The staff of the Securities and Exchange Commission is allowing companies to omit a new AFL-CIO proposal that seeks to bar current or former CEOs from serving on the compensation committee.

So far, Honeywell International, Verizon Communications, and Time Warner have successfully argued that this resolution can be excluded under Rule 14a-8(i)(6), because the companies lack the power to implement it.

For instance, Time Warner’s outside lawyers asserted in a Jan. 4 no-action petition that the proposal is excludable because the company cannot guarantee that compensation committee members will not become chief executive of a public company while serving on the panel. Time Warner lawyers also pointed out that the proposal provides no opportunity or mechanism for the company to remedy any violations of the requested policy.

In a Jan. 28 letter, Robert McGarrah, counsel for the AFL-CIO, responded that Time Warner would be able to cure any violation, because the proposal states that “it does not affect the unexpired terms of previously elected directors,” and thus a panel member who became a CEO would continue to serve out the remainder of his or her term on the committee.

“We’re very disappointed that the SEC made its decision on technicalities," said Vineeta Anand, chief research analyst with the labor federation. "By doing so, [the SEC] is encouraging companies to use the ‘kitchen sink’ approach to no-actions.”

Anand said the AFL-CIO will return with a revised proposal, noting, “[w]e will be back.”

Cigna and International Paper previously obtained SEC permission to exclude this proposal on proof-of-ownership grounds. The AFL-CIO has filed similar resolutions at Goldman Sachs, Eli Lilly, and Paccar. The labor federation withdrew at Avon Products after a settlement with the cosmetics company, which has agreed to revise its selection guidelines for its compensation committee so that non-CEO status will be a key factor, Anand said.

This proposal, according to AFL-CIO officials, was inspired by several academic studies that concluded that firms with multiple CEOs on their pay panels tend to ratchet up executive pay. This year, the labor federation targeted firms with a combined CEO/board chair, where CEO pay has increased despite negative share performance, and where at least two external chief executives sit on the compensation committee.

Too Much Information on Publicly-Traded Corporations? - Peter Kinder - ESG

2010-03-02T21:45:00Z

US disclosure-based regulation ... suffers from two critical failings. First, it lacks coherence in that shareholder rights are presently too weak to compensate for the hands-off regulatory approach. Second, disclosure has been deployed excessively as a regulatory tool, resulting in inundation of information.¹

So wrote Simon Wong, managing director at Governance for Owners and Adjunct Professor of Law, Northwestern University School of Law, in the Financial Times on Feb. 28.

]]> Mr. Wong’s solutions are the usuals: strengthen shareholder rights to remove board members, make disclosures more material, etc., etc., etc.

However, it is not at all clear that corporate boards should remain the main target of corporate governance reformers. Citizens United v. Federal Election Commission²emphatically reaffirmed the long-standing principle of the corporation as an entity – and one with a constitutionally protected role in society.

Hence, the behaviors shareholders have sought to influence are corporate, and therefore accountability should not be limited to boards. Investors must go farther into the entity and to the entity as such.

More troubling to our field, the Citizens United holding implicitly calls into question the notion of “self-regulating,” the private ordering of corporate behavior which has dominated the field for a generation. Shareholders, as integral constituents of the private entity, may be more problem than solution.

Mr. Wong’s complaints about too much disclosure seem aimed at volume rather than substance. They bring to mind some words of Louis Brandeis, from 1914, which rarely are quoted in full:

Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.³

I like to think Brandeis’s last phrase is self-referential. A man devoted to absorbing and explaining facts, he had spent years under electric lights policing banks and railroads. His lights illuminated books and legal pads; ours, computers and flat-screened monitors.

We have more tools, more collective knowledge than Brandeis had. We are today far more deeply involved with corporations as shareholders (directly and indirectly) and stakeholders than Brandeis was.

To ask for less data from the entities we’re supposed to police is to shirk our duty.

Footnotes

¹Simon Wong, “Failings of US Disclosure-Based Regulation”, Financial Times, Feb. 28, 2010 http://www.ft.com/cms/s/0/fca44ab2-2308-11df-a25f-00144feab49a.html?nclick_check=1 Thanks and a hat-tip to Scott Stapf of the The Hastings Group in Washington for calling my attention to this article.

² Citizens United v. Federal Election Commission, 558 U.S. ___ (Jan. 21, 2010) (hereafter “Citizens United”.)

³ Louis D. Brandeis, Other People’s Money and How the Bankers Use It (New York: Frederick A. Stokes, 1914), p. 92.

US Steps Up Extra-Territorial Bribery Prosecutions: A Survey of the Foreign Corrupt Practices Act - Francesco Navarrini - ESG

2010-02-25T16:25:00Z

On February 19, Bloomberg reported that Alcatel-Lucent “agreed to pay $137.4 million and change internal procedures to avoid U.S. prosecution for alleged bribes paid in Costa Rica, Taiwan and Kenya, according to a company regulatory filing.”

This settlement is part of a “serious crackdown” on violators of the US Foreign Corrupt Practices Act (FCPA), says Jan Fetter-Degges, Manager of RiskMetrics Group’s Global Sanctions Service. “Over the past year, the Justice Department has levied unprecedented fines on firms accused of foreign bribery and accounting fraud.”

]]> Besides Alcatel-Lucent, BAE and Daimler are among high-profile multinationals ensnared by FCPA, according to Bloomberg.

The sheer complexity of multinational corporations has, historically, served to protect them from scrutiny. This is why more vigorous enforcement of FCPA has repercussions throughout the global economy. The law’s “extra-territorial” reach across national borders can make questionable foreign accounting and business practices into material risks for investors.

“Consulting Company” Secured Contracts with Bribes

In a February 11 statement, Alcatel-Lucent described its settlement deal with US and French regulators. As part of the agreement, the company will “neither admit nor deny violations of the antibribery, internal controls and books and records provisions of the FCPA.”

The government’s case revolves around Christian Sapsizian, a former Alcatel-Lucent deputy vice president. Bloomberg reports:

Sapsizian, who negotiated Latin American contracts for Alcatel, admitted that he helped bribe a member of the board of Costa Rica’s state-owned telecommunications authority to secure lucrative cell phone contracts for the company. …
Prosecutors said Sapsizian and Alcatel used a consulting company to funnel bribes to the Costa Rican official, who helped reward Alcatel with the cellular contracts. Sapsizian cooperated with prosecutors and is serving a 30-month prison term.

The “Extra-Territorial” Powers of the FCPA

The FCPA was signed into law by President Jimmy Carter in 1977. The Justice Department, in its history of the FCPA, describes how the law’s reach was then expanded globally:

Following the passage of the FCPA, the Congress became concerned that American companies were operating at a disadvantage compared to foreign companies who routinely paid bribes and, in some countries, were permitted to deduct the cost of such bribes as business expenses on their taxes. …
In 1997, almost ten years later, the United States and thirty-three other countries signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

FCPA’s so-called “extra-territorial jurisdictional reach” was strengthened by two 1998 amendments included in the International Anti-Bribery Act. These changes held firms whose stock traded on US exchanges more explicitly liable for crimes committed in foreign countries.

To sum up:

1) Both U.S. companies and foreign companies listed on a U.S. stock exchange are liable for paying or offering to pay, directly or indirectly, money or anything of value to a foreign official to obtain or retain business (articles 78dd-1(g) and 78dd-2(i)).

2) A foreign company can be liable under the FCPA for corrupt payments “while in the territory of the US” through application of article 78dd-3, which applies to all companies, not just those who issue stock in the US.

3) Moreover, the FCPA contains broad provisions under which the actions of foreign subsidiaries and other third parties can result in FCPA liability to a parent company.

FCPA in Action

The first foreign FCPA target after the 1998 amendments was Norway’s state-controlled Statoil ASA, now known as StatoilHydro ASA. In 2006, the firm agreed to pay a total of $21 million to settle criminal and administrative charges for paying bribes to an official in order to secure oil and gas rights in Iran.

Statoil was held liable to the anti-bribery provisions because the improper payments were routed through a US bank in New York. (In November 2009, the charges against Statoil ASA were dismissed with prejudice, for the company satisfied obligations under a deferred prosecution agreement.)

Another example of the extra-territorial capacity of the FCPA is the December 2009 case of Panalpina, a Swiss company and one of the world's leading suppliers of forwarding and logistics services. Panalpina was held liable for improper payments made to Nigerian customs by a third party, Vetco International, on Panalpina’s behalf.

The Limits of FCPA

While FCPA can penalize firms and prosecute individuals, it does not necessarily undo the effects of corrupt business practices. For example, while Statoil was punished for buying access to the Iranian market, it didn’t leave Iran after its 2006 FCPA settlement. Statoil did subsequently refrain from new Iranian investments, but only because it was threatened with sanctions by the US.

Perhaps a more daunting obstacle to full disclosure of foreign corrupt practices remains the difficulty of investigating cases in foreign countries. Iran, for example, is unlikely to cooperate fully with US investigators. If the US had been unable to prosecute and bargain with Christian Sapsizian, the case of Alcatel-Lucent may have come to a very different conclusion.

And yet, the global sweep of Alcatel-Lucent’s offenses suggests that more FCPA-related risks may be hiding in plain sight – even if they’re underwater. As the Bloomberg report explained:

The Feb. 11 filing by Alcatel also discussed allegations about bid-rigging and illicit payments involving a Taiwan Railway contract, an investigation into an unidentified supply contract in Kenya, payments made by subsidiaries in Nigeria, and a French investigation of a submarine cable contract in French Polynesia.
In November, subsidiary Alcatel-Lucent Submarine Networks was charged in French Polynesia with “benefitting from favoritism” over contracts it was awarded in 2007 for a submarine cable between Tahiti and Hawaii, Alcatel said.

Francesco Navarrini is Associate Manager of RiskMetrics Group’s Global Sanctions Service.

CVS Caremark, Wells Fargo Agree to Hold Pay Votes - Ted Allen - Governance

2010-02-24T20:44:45Z

CVS Caremark and Wells Fargo this week joined the growing list of U.S. issuers that plan to hold advisory votes on executive compensation.

CVS Caremark, the largest U.S. pharmacy chain, agreed to conduct an advisory vote after a “say on pay” proposal filed by the Connecticut Retirement Plans and Trust Funds earned 61.6 percent support in 2009. The Connecticut pension system is withdrawing the resolution it filed for this season. The Rhode Island-based firm plans to hold its first pay vote in 2011, according to Connecticut pension officials.

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“The public is outraged by oversized paychecks that reward poor performance, and rightfully so,” Connecticut State Treasurer Denise Nappier said in a Feb. 23 press release. “By granting shareholders the right to provide input on its pay practices, CVS Caremark has demonstrated that it has nothing to hide in the manner it compensates its executives. More companies should do the same.”

Wells Fargo, the fourth largest U.S. bank by assets, plans to hold its first voluntary vote at its annual meeting in late April. The San Francisco-based company was required to conduct an advisory vote last year when it participated in the U.S. government’s Troubled Asset Relief Program, and received 95 percent support for its pay practices. ”Say on pay” resolutions filed by Walden Asset Management received 35 percent support at Wells Fargo in 2007, and 30 percent approval in 2008.

“Our stockholders have always been able to communicate with the board on matters of interest to them. This year's advisory vote gives them an additional opportunity for participation in the company's compensation process,” Steve Sanger, chair of Wells Fargo’s human resources committee, said in a company press release.

So far, 49 U.S.-based companies have agreed to hold voluntary pay votes, or have done so already. The pace of “say on pay” adoptions has picked up in recent months; at least 23 issuers have announced or agreed to pay vote commitments since the end of the spring 2009 proxy season, according to RiskMetrics Group data.

Even with these recent agreements, it appears likely that dozens of shareholder “say on pay” proposals will appear on corporate ballots this year. As of Feb. 15, there were 47 pending resolutions, according to RiskMetrics data.

Investors, Legislators Respond to Citizens United Ruling - Alicia Caramenico - ESG

2010-02-24T14:45:00Z

In response to the U.S. Supreme Court's Citizens United v. Federal Election Commission decision, investors and lawmakers are mobilizing to obtain more disclosure on corporate political spending.

]]> The Center for Political Accountability (CPA), a Washington-based advocacy group, has been coordinating a seven-year investor campaign to press companies to provide more disclosure on campaign contributions, their policies for spending on political races, their contributions to trade associations, and the corporate officials responsible for those spending decisions. About 70 companies--including almost half of the S&P 100--have agreed to provide more disclosure, according to the CPA.

At 3:00 pm on February 24, Bruce Freed of CPA will participate in a conference call on Citizens United for members of the Social Investment Forum (SIF), which includes RiskMetrics Group.

The high court's Jan. 21 ruling allows unlimited independent corporate spending in political campaigns. Firms may now use company resources to fund any type of political advertisements, even those opposing or endorsing candidates. Some investors fear that the volume of corporate contributions will increase dramatically, as political organizations press companies to ramp up their spending.

As of Feb. 15, investors had filed 49 proposals that seek more disclosure on political spending, according to RiskMetrics data. Among investors supporting this campaign are the New York City Employees' Retirement System, the Interfaith Center on Corporate Responsibility, the Social Investment Forum, Pax World Management, Walden Asset Management, and shareholder advocate Robert Monks.

In addition, nine members of the Council of Institutional Investors have co-signed a CPA letter that urges S&P 500 firms to provide more disclosure and ensure that there is board oversight of political decisions.

The ShareOwners.org advocacy group also is mobilizing on the issue. On Feb. 4, the group said it would support the shareholder proposal campaign, petition the SEC for a rule-making on the issue, and urge Congress to ensure shareholders have all tools they need to ensure that corporate political spending does not erode shareholder value.

"Our focus is to ensure that the interests of investors are not steamrollered in the pursuit of unrestrained corporate politicking," Maureen Thompson, the group's interim executive director, said in a statement.

Some Democratic lawmakers have reacted to the Citizens United ruling by introducing legislation. Rep. Chris Van Hollen of Maryland and Senator Charles Schumer of New York are drafting a bill that would restrict political expenditures by foreign interests, federal contractors, and financial firms that receive federal assistance. Their bill also would require enhanced disclosure to shareholders and the public. "If corporations spend their funds in campaigns, voters have a right to know who is delivering and paying for the message," Van Hollen said in a Feb. 10 press statement.

Another Democrat, Rep. Michael Capuano of Massachusetts, introduced legislation on Jan. 27 to require companies to obtain shareholder approval--from investors holding a majority of shares outstanding and without including broker votes--before spending more than $10,000 in a fiscal year on political activities.

Rep. Alan Grayson of Florida has drafted two bills. His first measure, introduced Jan. 13, would prohibit any national securities exchange from listing a corporation's shares unless the company complies with the federal regulations governing corporate contributions and expenditures that were in effect during 2008 elections. His second bill, introduced Jan. 21, would require shareholder approval for a company to spend money to influence public opinion on matters not related to the company's products or services.

Click here to learn more about the Center for Political Accountability.

SEC Seeks to Boost Retail Investor Voting - Ted Allen - Governance

2010-02-23T14:49:10Z

On Monday, the Securities and Exchange Commission announced several measures that seek to improve the rate of proxy voting by individual investors.

The SEC finalized amendments to its so-called “e-proxy rules,” under which companies may send a notice about the online availability of proxy materials, instead of bearing the expense of mailing a full set of proxy materials to every investor.

]]> The amendments seek to address the low rate of retail participation, which has declined further since the SEC adopted its original e-proxy (also known as “notice and access”) rule in 2007, particularly at notice-only firms. More than 1,300 issuers used the notice-only approach to distribute materials to all or some of their shareholders in 2009, according to Broadridge Financial. According to the Broadridge statistics from July 1, 2008, to May 31, 2009, the retail investor response rate was 27.7 percent at companies that used the notice-only option for some of their beneficial owners, as compared with 31.8 percent at issuers that only used full-set delivery.

The importance of retail participation has increased since the SEC approved a New York Stock Exchange rule change in July to bar brokers from casting uninstructed client votes in uncontested board elections. Corporate advocates have expressed concern that small- and mid-cap companies with a significant retail investor base will have to bear additional solicitation costs.

“Investor participation in elections at companies they own is critical to effective corporate governance,” SEC Chairman Mary L. Schapiro said in a press release. “The recent changes to the voting rules for the election of directors have increased the importance of voter participation.”

Under the rule amendments, shareholders may be provided with additional materials that explain the e-proxy rules. Issuers and other soliciting entities will have greater flexibility on the language and formatting that may appear in notices. The new rules will take effect 30 days after publication in the Federal Register, so they will apply to notices for corporate meetings late in the spring U.S. proxy season.

The SEC also published an alert, New Shareholder Rules for the 2010 Proxy Season. The alert provides investors with information on the recent changes to the NYSE broker voting rule and the impact on proxy voting.

Investors Urge Senators to Retain Proxy Access and Majority Voting Provisions - Ted Allen - Governance

2010-02-22T20:30:45Z

The Council of Institutional Investors (CII) is asking its members to lobby Senate Banking Committee members to keep proxy access and majority voting provisions in the financial reform legislation that is now before the panel.

Senator Christopher Dodd, who chairs the committee, is expected to release a revised draft of legislation, the “Restoring American Financial Stability Act of 2009,” later this week, according to CII. A mark-up hearing likely will occur next week. “There are reports that the revised draft will eliminate any corporate governance measures,” CII noted in an alert to members today.

Dodd’s original bill, which was unveiled in November, included provisions to mandate an annual advisory vote on executive compensation, and to require issuers to use a majority voting standard n uncontested director elections. His original draft bill also affirmed that the SEC has the legal authority to issue a rule on proxy access.

The Business Roundtable and other business groups have urged the Banking Committee to remove the governance provisions from the revised bill. In a recent letter, the groups warn that those provisions “will lead to serious unforeseen (and foreseeable) consequences that will inhibit job creation, endanger the ongoing economic recovery, and prevent the American economy from reaching its full potential.”

The House of Representatives passed legislation in December that would mandate advisory votes on compensation and affirm the SEC’s ability to issue a proxy access rule. That bill didn’t include a majority voting provision.

Also today, members of SEC’s Investor Advisory Committee discussed the possibility of having the SEC propose a new disclosure rule to require issuers to explain their reasons for choosing plurality or majority voting standard in board elections. The SEC recently adopted a similar disclosure rule whereby firms must explain their reasons for combining the CEO and board chair roles or selecting another board leadership structure. Several panel members endorsed such an approach if Congress doesn’t approve legislation with a majority voting mandate.